Fixed Income

1. A capital market security has an original maturity longer than one year.
2. A company has issued a floating-rate note with a coupon rate equal to the three-month
MRR + 65 bps. Interest payments are made quarterly on 31 March, 30 June, 30
September, and 31 December. On 31 March and 30 June, the three-month MRR is
1.55% and 1.35%, respectively. The coupon rate for the interest payment made on 30
June is:
3. The coupon rate that applies to the interest payment due on 30 June is based on the
three-month MRR rate prevailing on 31 March. Thus, the coupon rate is 1.55% +
0.65% = 2.20%.
4. A cap in a floating-rate note (capped FRN) prevents the coupon rate from increasing
above a specified maximum rate. This feature benefits the issuer in a rising interest
rate environment because it sets a limit to the interest rate paid on the debt.
5. A zero-coupon, or pure discount, bond pays no interest; instead, it is issued at a
discount to par value and redeemed at par. As a result, the interest earned is implied
and equal to the difference between the par value and the purchase price.
6. Deferred coupon bonds pay no coupon for their first few years but then pay higher
coupons than they otherwise normally would for the remainder of their life. Deferred
coupon bonds are common in project financing when the assets being developed may
not generate any income during the development phase, thus not providing cash flows
to make interest payments. A deferred coupon bond allows the issuer to delay interest
payments until the project is completed and the cash flows generated by the assets can
be used to service the debt.
7. The conversion premium is the difference between the convertible bond’s price and
its conversion value.
8. Eurobonds are issued internationally, outside the jurisdiction of any single country.
9. Asset-backed securities are securitized debt instruments created by securitization, a
process that involves transferring ownership of assets from the original owners to a
special legal entity. The special legal entity then issues securities backed by the
transferred assets. The assets’ cash flows are used to pay interest and repay the
principal owed to the holders of the securities. Assets that are typically used to create
securitized debt instruments include loans (such as mortgage loans) and receivables
(such as credit card receivables). The structured finance sector includes such
securitized debt instruments (also called asset-backed securities).
10. Interbank offered rates are used as reference rates not only for floating-rate bonds but
also for other debt instruments, including mortgages, derivatives such as interest rate
and currency swaps, and many other financial contracts and products.
11. In an underwritten offering (also called firm commitment offering), the investment
bank (called the underwriter) guarantees the sale of the bond issue at an offering price
that is negotiated with the issuer. Thus, the underwriter takes the risk of buying the
newly issued bonds from the issuer and then reselling them to investors or to dealers,
which then sell them to investors.
12. In major developed bond markets, newly issued sovereign bonds are sold to the
public via an auction.
13. A shelf registration allows certain authorized issuers to offer additional bonds to the
general public without having to prepare a new and separate offering circular. The
issuer can offer multiple bond issuances under the same master prospectus and only
has to prepare a short document when additional bonds are issued.
14. In over-the-counter (OTC) markets, buy and sell orders are initiated from various
locations and then matched through a communications network. Most bonds are
traded in OTC markets.
15. Liquidity in secondary bond markets refers to the ability to buy or sell bonds quickly
at prices close to their fair market value
16. The vast majority of corporate bonds are traded in over-the-counter (OTC) markets
that use electronic trading platforms through which users submit buy and sell orders.
Settlement of trades in the OTC markets occurs by means of a simultaneous exchange
of bonds for cash on the books of the clearing system “on a paperless, computerized
book-entry basis.”
17. Floaters are bonds with a floating rate of interest that resets periodically based on
changes in the level of a reference rate, such as Libor. Because changes in the
reference rate reflect changes in market interest rates, price changes of floaters are far
less pronounced than those of fixed-rate bonds, such as coupon bonds and discount
bonds. Thus, investors holding floaters are less exposed to interest rate risk than
investors holding fixed-rate discount or coupon bonds.
18. The IMF is a multilateral agency that issues supranational bonds. sovereign bonds and
quasi-government bonds are issued by national governments and by entities that
perform various functions for national governments, respectively.
19. Bonds issued by levels of government below the national level—such as provinces,
regions, states, cities, and local government authorities—are classified as non-
sovereign government bonds. These bonds are typically not guaranteed by the
national government.
20. Commercial paper, whether US commercial paper or Eurocommercial paper, is
negotiable—that is, investors can buy and sell commercial paper on secondary
markets.
21. With a serial maturity structure, a stated number of bonds mature and are paid off on a
pre-determined schedule before final maturity. With a sinking fund arrangement, the
issuer is required to set aside funds over time to retire the bond issue. Both result in a
pre-determined portion of the issue being paid off according to a pre-determined
schedule.
22. A repurchase agreement (repo) can be viewed as a collateralized loan in which the
security sold and subsequently repurchased represents the collateral posted.
23. Repo margins vary by transaction and are negotiated bilaterally between the
counterparties.
24. A portfolio manager is considering the purchase of a bond with a 5.5% coupon rate
that pays interest annually and matures in three years. If the required rate of return on
the bond is 5%, the price of the bond per 100 of par value is closest to:
PV=PMT/(1+r)1+PMT/(1+r)2+PMT+FV/(1+r)3,
PV=5.5/(1+0.05)1+5.5/(1+0.05)2+5.5+100/(1+0.05)3.
PV = 5.24 + 4.99 + 91.13 = 101.36.
 25. A bond with two years remaining until maturity offers a 3% coupon rate with interest
paid annually. At a market discount rate of 4%, the price of this bond per 100 of par
value is closest to:
PV=3/(1+0.04)1+3+100/(1+0.04)2=2.88+95.23=98.11.
26. Consider the following two bonds that pay interest annually:

Bon Coupon Time-to-

d Rate Maturity

A 5% 2 years

B 3% 2 years
At a market discount rate of 4%, the price difference between Bond A and Bond B
per 100 of par value is closest to:
PV=PMT/(1+r)1+PMT/(1+r)2,
PV=2/(1+0.04)1+2/(1+0.04)2=1.92+1.85=3.77.
27. A higher-coupon bond has a smaller percentage price change than a lower-coupon
bond when their market discount rates change by the same amount (the coupon
effect). Also, a shorter-term bond generally has a smaller percentage price change
than a longer-term bond when their market discount rates change by the same amount
(the maturity effect).
28. The relationship between bond prices and market discount rate is not linear. The
percentage price change is greater in absolute value when the market discount rate
goes down than when it goes up by the same amount (the convexity effect). If a 100
bp decrease in the market discount rate will cause the price of the bond to increase by
5%, then a 100 bp increase in the market discount rate will cause the price of the bond
to decline by an amount less than 5%.
29. Generally, for two bonds with the same time-to-maturity, a lower-coupon bond will
experience a greater percentage price change than a higher-coupon bond when their
market discount rates change by the same amount.
30. Bond dealers usually quote the flat price. When a trade takes place, the accrued
interest is added to the flat price to obtain the full price paid by the buyer and received
by the seller on the settlement date. The reason for using the flat price for quotation is
to avoid misleading investors about the market price trend for the bond.
31. Bond G, described in the exhibit below, is sold for settlement on 16 June 2020.
Annual Coupon 5%
Coupon Payment Frequency Semiannual
Interest Payment Dates 10 April and 10 October
Maturity Date 10 October 2022
Day-Count Convention 30/360
Annual Yield-to-Maturity 4%
The full price that Bond G settles at on 16 June 2020 is closest to:
PV=PMT/(1+r)1+PMT/(1+r)2+PMT/(1+r)3+PMT/(1+r)4+PMT+FV/(1+r)5,
PV=2.5/(1+0.02)1+2.5/(1+0.02)2+2.5/(1+0.02)3+2.5/(1+0.02)4+2.5+100/(1+0.02)5.
PV = 2.45 + 2.40 + 2.36 + 2.31 + 92.84 = 102.36.
 The accrued interest period is identified as 66/180. The number of days between 10
April 2020 and 16 June 2020 is 66 days, based on the 30/360 day-count convention
(20 days remaining in April + 30 days in May + 16 days in June = 66 days total). The
number of days between coupon periods is assumed to be 180 days using the 30/360
day convention.
PVFull = PV × (1 + r)66/180.
PVFull = 102.36 × (1.02)66/180 = 103.10.

32. Matrix pricing allows investors to estimate market discount rates and prices for bonds:
that are not actively traded
33. When underwriting new corporate bonds, matrix pricing is used to get an estimate of
the: required yield spread over the benchmark rate
34. The formula to convert an annual percentage rate (annual yield-to-maturity) from one

periodicity to another is as follows:

35. the formula for calculating the discount margin is

36. The bond equivalent yield of a 180-day banker’s acceptance quoted at a discount rate

of 4.25% for a 360-day year is closest to:

37. A yield curve constructed from a sequence of yields-to-maturity on zero-coupon
bonds is the: spot curve
38. The rate interpreted to be the incremental return for extending the time-to-maturity of
an investment for an additional time period is the: forward rate
39. The spread component of a specific bond’s yield-to-maturity is least likely impacted
by changes in: inflation in its currency of denomination
40. The yield spread of a specific bond over the standard swap rate in that currency of the
same tenor is best described as the: I – spread
41. An option-adjusted spread (OAS) on a callable bond is the Z-spread: minus the value
of the embedded call option expressed in basis points per year.
42. Securitization increases the funds available for banks to lend because it allows banks
to remove loans from their balance sheets and issue bonds that are backed by those
loans.
43. By removing the wall between ultimate investors and originating borrowers, investors
can achieve better legal claims on the underlying mortgages and portfolios of
receivables. This transparency allows investors to tailor interest rate risk and credit
risk to their specific needs.
44. Securitization benefits investors by: providing more direct access to a wider range of
assets.
45. In a securitization, the collateral is initially sold by the: depositor
46. A special purpose entity issues asset-backed securities in the following
structure.
 Par Value (€
Bond Class millions)

A (senior) 200

B 20
(subordinated
)

C 5
(subordinated
)
At which of the following amounts of default in par value would Bond Class A experience a
loss? The first €25 (€5 + €20) million in default are absorbed by the subordinated classes (C
and B). The senior Class A bonds will experience a loss only when defaults exceed €25
million.
47. In a securitization, time tranching provides investors with the ability to choose
between: extension and contraction risk
48. The creation of bond classes with a waterfall structure for sharing losses is referred to
as: credit tranching
49. A goal of securitization is to: separate the seller’s collateral from its credit ratings
50. In a partially amortizing loan, the sum of all the scheduled principal repayments is
less than the amount borrowed. The last payment is for the remaining unpaid
mortgage balance and is called the “balloon payment.”
51. if a mortgage borrower makes prepayments without penalty to take advantage of
falling interest rates, the lender will most likely experience: contraction risk
52. In a recourse loan, the lender has a claim against the borrower for the shortfall
between the amount of the mortgage balance outstanding and the proceeds received
from the sale of the property.
53. A balloon payment equal to a mortgage’s original loan amount is a characteristic of a:
bullet mortgage
54. a typical feature of a non-agency residential mortgage-backed security (RMBS) :
senior/subordinate structure
55. If interest rates increase, an investor who owns a mortgage pass-through security is
most likely affected by: extension risk
56. CMOs can meet the asset/liability requirement of institutional investors
57. The longest-term tranche of a sequential-pay CMO is most likely to have the lowest:
contraction risk
58. PAC tranches have limited (but not complete) protection against both extension risk
and contraction risk.
59. Compared with the weighted average coupon rate of its underlying pool of mortgages,
the pass-through rate on a mortgage pass-through security is: lower
60. The single monthly mortality rate (SMM) most likely: decreases as contraction risk
falls
61. Credit risk is an important consideration for commercial mortgage-backed securities
(CMBS) if the CMBS are backed by mortgage loans that: non recourse
62. With CMBS, investors have considerable call protection. An investor in an RMBS is
exposed to considerable prepayment risk, but with CMBS, call protection is available
to the investor at the structure and loan level.
63. If specific ratios of debt to service coverage are needed and those ratios cannot be met
at the loan level, subordination is used to achieve the desired credit rating.
64. An excess spread account incorporated into a securitization is designed to limit: credit
risk
65. Because credit card receivable ABS are backed by non-amortizing loans that do not
involve scheduled principal repayments, they are not affected by prepayment risk.
66. In auto loan ABS, the form of credit enhancement that most likely serves as the first
line of loss protection is the: excess spread account
67. The mezzanine tranche consists of bond classes with credit ratings between senior and
subordinated bond classes.
68. The key to a CDO’s viability is the creation of a structure with a competitive return
for the: subordinated tranche
69. When the collateral manager fails pre-specified risk tests, a CDO is: deleveraged by
reducing the senior bond class
70. A put allows the bondholder to sell the security back to the issuer if the bondholder
chooses to do so.
71. A floating-rate note will be less affected when market interest rates increase because
the coupon rate varies directly with market interest rates and is reset at regular
intervals.
72. Proceeds for repaying securitized bonds most likely come from the: cash flows of the
underlying financial assets
73. If the collateral is in short supply or if there is a high demand for it, repo margins are
lower. Repo margin is the difference between the market value of the security used as
collateral and the value of the loan.
74. Consider two bonds that are identical except for their coupon rates. The bond that will
have the highest interest rate risk most likely has the: lower coupon rate
75. All else being equal, the difference between the nominal spread and the Z-spread for a
non-Treasury security will most likely be larger when the: yield curve is steep
76. The agreed-on bond price excluding accrued interest is referred to as the flat price.
77. DMT Corp. issued a five-year floating-rate note (FRN) that pays a quarterly coupon
of three-month market reference rate (MRR) plus 125 bps. The FRN is priced at 96
per 100 of par value. Assuming a 30/360-day count convention, evenly spaced
periods, and constant three-month market reference rate (MRR) of 5%, the discount
 margin for the FRN is closest to:

78. A fully amortizing mortgage is least likely to contain a balloon payment because the
sum of all the scheduled principal repayments during the mortgage’s life is such that
when the last mortgage payment is made the loan is paid in full.
79. An investor who owns a mortgage pass-through security is exposed to contraction
risk, which is the risk that when interest rates: decline, the security will effectively
have a shorter maturity than was anticipated at the time of purchase
80. In the securitization process, the seller of the collateral, the special purpose entity, and
the servicer of the loan are the main parties. All other parties, including independent
accountants, lawyers/attorneys, trustees, underwriters, rating agencies, and financial
guarantors are third parties to the transaction.
81. In a mortgage pass-through security, the pass-through rate adjusts the rate on the
underlying pool of mortgages by a servicing fee
82. Investors in commercial mortgage-backed securities (CMBS) face balloon risk, which
is most likely a type of: extension risk
83. A structural call protection can be achieved in a CMBS when it is structured to have
sequential-pay tranches by credit rating.
84. From the perspective of a CDO manager, an arbitrage collateralized debt obligation
most likely differs from a traditional asset-backed security because it involves the:
active management of the collateral
85. In a securitization, the seller of the pool of securitized assets is the: depositor
86. The best measure of the percentage of the outstanding mortgage balance prepaid in a
given year is the: conditional prepayment rate
87. A key distinction between commercial mortgage-backed securities (CMBSs) and
residential mortgage-backed securities (RMBSs) is that CMBSs most likely: have
balloon maturities
88. For non-amortizing, non-mortgage asset-backed securities, the lockout period most
likely represents when: repaid principal is reinvested in loans of equal principal
89. A CMO is structured with PAC tranches. The tranche most likely to provide
protection against both extension risk and contraction risk is the tranche experiencing
actual prepayment rates that are: between lower and upper PSA prepayment
assumption
90. A capital gain is least likely to contribute to the investor’s total return.
91. An investor purchases a bond at a price above par value. Two years later, the investor
sells the bond. The resulting capital gain or loss is measured by comparing the price at
which the bond is sold to the: carrying value

92.
93.
94. Key rate duration is used to measure a bond’s sensitivity to a shift at one or more
maturity segments of the yield curve which result in a change to yield curve shape.

95.
96. A bond’s Macaulay duration is inversely related to its yield-to-maturity.
97. Assuming no change in the credit risk of a bond, the presence of an embedded put
option: reduces the effective duration of the bond
98. A limitation of calculating a bond portfolio’s duration as the weighted average of the
yield durations of the individual bonds that compose the portfolio is that it: assumes a
parallel shift to the yield curve

99.

100.
101. If the term structure of yield volatility is downward-sloping, then short-term
bond yields-to-maturity have greater volatility than for long-term bonds. Therefore,
long-term yields are more stable than short-term yields.
102. The holding period for a bond at which the coupon reinvestment risk offsets
the market price risk is best approximated by: macaulay duration
103. When the investor’s investment horizon is less than the Macaulay duration of
the bond she owns: market price risk dominates, and the investor is at risk of higher
rates.
104. A manufacturing company receives a ratings upgrade and the price increases
on its fixed-rate bond. The price increase was most likely caused by a(n): decrease in
the bond’s credit spread
105. Empirical duration is the best measure—better than analytical duration—of
the impact of yield changes on portfolio value, especially under stressed market
 conditions, for a portfolio consisting of a variety of different bonds from different
issuers
106. The risk that a bond’s creditworthiness declines is best described by: credit
migration risk
107. If the debt of the company remained unchanged but FFO increased, more cash
was available to service debt compared to the previous year. Additionally, debt/capital
improved, which implies that the ability of Pay Handle Ltd to service their debt also
improved.
108. Holding all other factors constant, the most likely effect of low demand and
heavy new issue supply on bond yield spreads is that yield spreads will: widen
109. The risk that the price at which investors can actually transact differs from the
quoted price in the market is called: market liquidity risk
110. Loss severity is the portion of a bond’s value (including unpaid interest) an
investor loses in the event of default.
111. For a high-quality debt issuer with a large amount of publicly traded debt,
bond investors tend to devote most effort to assessing the issuer’s: default risk
112. A second lien has a secured interest in the pledged assets. Second lien debt
ranks higher in priority of payment than senior unsecured and senior subordinated
debt and thus would most likely have a higher recovery rate
113. The process of moving credit ratings of different issues up or down from the
issuer rating in response to different payment priorities is best described as: notching
114. Which type of security is most likely to have the same rating as the issuer?
Senior unsecured bond
115. Second lien debt is secured debt, which is senior to unsecured debt and to
subordinated debt.
116. determining the capacity of a borrower to service debt, a credit analyst should
begin with an examination of: industry structure
117. Capacity refers to the ability of a borrower to service its debt. Capacity is
determined through credit analysis of an issuer’s industry and of the specific issuer.
118. Credit yield spreads most likely widen in response to: weak performance of
equities
119. Weakening economic conditions will push investors to desire a greater risk
premium and drive overall credit spreads wider.
120. Credit spreads are most likely to widen: in periods of heavy new issue supply
and low borrower demand
121. following factors in credit analysis is more important for general obligation
non-sovereign government debt than for sovereign debt: requirement to balance an
operating budget

122.
123. Compared with investment-grade bonds, the spread movements on high-yield
bonds are influenced: less by interest rate changes and exhibit a greater correlation
with movements in equity markets
124. Third lien debt is secured debt. It has a secured interest in the pledged assets
and ranks higher than all other unsecured debts.
125. A problem for bond investors relying on credit ratings as a basis for buy and
sell decisions is that credit ratings: can badly lag changes in bond prices
126. High-yield bond analysis differs from investment-grade bond analysis in that
high-yield: convenant analysis is more important than for investment grade bonds
127. For bonds that are otherwise identical, the one exhibiting the highest level of
positive convexity is most likely the one that is: putable
128. Holding all other characteristics the same, the bond exposed to the greatest
level of reinvestment risk is most likely the one selling at: a premium
129. In a low interest rate environment, the effective duration of a callable bond
relative to a comparable non-callable bond, will most likely be: lower
130. A callable bond exhibits negative convexity at low yield levels and positive
convexity at high yield levels.
131. The duration gap is the bond’s Macaulay duration minus the investment
horizon, which is positive in this case. A positive duration gap implies that the
investor is currently exposed to the risk of higher interest rates.
132. Duration is most accurate as a measure of interest rate risk for a bond portfolio
when the slope of the yield curve: stays the same
133. A bond’s duration is its price sensitivity to yield changes
134. Which of the following conditions is not required for the realized horizon
yield to equal the original yield to maturity on an option-free, fixed-coupon bond?
The bond is held to maturity
135. The weighted average number of years to receipt of the principal and interest
payments that will result in realization of the initial market discount rate on a bond is
best described as macaulay duration
136. The effective duration and modified duration of an option-free bond are
identical only in the rare circumstance of an absolutely flat yield curve.
137. Calculating portfolio duration as the weighted average of time to receipt of the
aggregate cash flows: results in a theoretically correct but less commonly used
measure of portfolio interest rate risk

138.
139. For a long-term, zero-coupon bond, which of the following factors contributes
to heightened difference between the bond’s yield convexity and curve convexity? A
long time to maturity
140. The effective convexity of a bond is a measurement of the effect of a change
in: a benchmark yield curve
141. when a bond investor’s coupon reinvestment risk dominates market price risk,
the investor’s investment horizon must be: greater than the macaulay duration of the
bond
142. The best reason for choosing effective, rather than modified, duration as a risk
measure for a callable bond is because: of its superiority in measuring securities with
ill-defined internal rates of return
143. All else equal, interest rate risk is lowest for which of the following non-
callable bonds? Premium
144. A longer time to maturity usually leads to higher duration. It always does so
for a bond priced at a premium or par value. But if the bond is priced at a discount, a
longer time to maturity might lead to a lower duration. The situation occurs only if the
coupon rate is low (but not zero) relative to the yield and the time to maturity is long.